Post #4690 by lizgdal on the Mechanical Investing board

Investment Strategies / Mechanical Investing

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mungofitch wrote (using 7-year CAPE):
As an alternative view, quintiles of CAPE, 1960-2018, and one year forward US stock returns for dates starting in that valuation quintile:
Most expensive 1/5 of the time: 3.1%
Next 1/5: 7.6%
Next 1/5: 7.8%
Next 1/5: 13.1%
Cheapest 1/5 of the time: 18.7%

Something changed around 1991. Comparing earnings yields before and after 1991 is suspect. In 1991, the S&P 500 price increased 26% while earnings dropped.

Year  Earnings Yield  Dividend Yield  S&P 500  Earnings  Dividends  changeP  changeE
1960      5.34%           3.41%        58.11     3.10      1.98
...
1989      6.80%           3.32%       353.40     24.32     11.73
1990      6.58%           3.74%       330.22     22.65     12.35      -7%      -7%
1991      4.58%           3.11%       417.09     19.30     12.97      26%      -15%
1992      4.16%           2.90%       435.71     20.87     12.64      4%       8%
1993      4.25%           2.72%       466.45     26.90     12.69      7%       29%
...

data from S&P Earnings: 1960-Current (raw data from Bloomberg and S&P). https://pages.stern.nyu.edu/~adamodar/New_Home_Pag...

Using Shiller CAPE data, the S&P 500 earnings yield (trailing 1-year) averaged 8.0% from 1871 to 1989, and 4.6% from 1990 to 2025:

From   To   years  Avg    SD
1871  2025   155   7.2%  2.7%
1871  1989   119   8.0%  2.6%
1990  2025    36   4.6%  1.2%

There was an extra Price doubling around 1990:

Real S&P 500:     E     From   To        P     From   To
                                        flat   1870  1880
                 flat   1870  1895
                                      doubled  1880  1900
               doubled  1895  1905
                                        flat   1900  1950
                 flat   1905  1950
 
               doubled  1950  1965    doubled  1950  1985
                 flat   1965  1995    doubled  1985  1995
 
               doubled  1995  2005    doubled  1995  2000
 
               doubled  2005  2025      flat   2000  2012
                                      doubled  2012  2020

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